Economic Outlook: Savings Will Soon Drive Increased Spending

I've been saying that consumer spending would soon increase. It has not happened yet, but consumers are now in position to get going. The key concept is that consumers have not been income constrained, as a group. In the aggregate, they are simply scared. They have the income to spend more, but they choose not to. Here are the month-by-month changes in disposable income and spending since last September (when the economy really started to tank):

Late last year, incomes were down sharply (the orange columns) but spending was only down a little. So far this year, there have been significant income gains, but without spending gains. So it is absolutely wrong to say that people have cut back on their spending because they don't have the money to spend. Certainly some people are in that condition, but not the aggregate mass of consumers.

As a result, the savings rate has risen sharply:

My look at long-run history (see this post) leads me to think that consumers will get back to savings of 8 to 10 percent of disposable income. Here are two ways to get there: continue recent patterns of saving all income gains for another four or five months, then spend the bulk of the income gains. That would add a good push to consumer spending, and thus the economy.

The second approach, which I think is more likely, is for the savings rate to come down a bit from the latest spike, like down to three or four percent. Then consumers would gradually ramp it up to the 8 to 10 percent range. If this happens, then spending growth will outpace income growth for a few months. This seems to be how past long-term changes in savings have occurred. This scenario is very positive for the economy in the next six months.

Comments

[Chief buffalo:]

As long as the administration continues the policies as indicated, there is no reason for the consumer to spend or to go into debt as we have known in the past. My advice to the young, Save,Save,Save and put the funds in an inflation proof source. Employment is going to increase and by the administrations admission, energy costs are to increase, this will cause an increase on all other aspects of the economy from cosmetics to food. Save, young people, as much as you can.

Jun 28 02:12 PM

[Ali Mogharabi:]

Given the fact that growth in disposable income was driven by govt payouts, I'm not sure if the consumer will jump back in right away. Also, unemployment also impacts future spending negatively. What may be different in this recession is that the consumer has nothing else to fall back on in order to keep spending - wealth has plummeted, no job, no income, owe on the house and the credit cardS, and much more. So I think those factors will extend this more savings/less spending behavior further out, which will slow down the overall economic recovery, but will make the post-recession economic growth more steady and likeley at a lower rate, which hopefully makes it more maintainable. That's very important given the huge risk of inflation that's waiting for us out there.

Jun 28 02:16 PM

[drpaul1139:]

I agree that savings will soon drive increased spending but not for the reasons that you give here.

Product Equity Value© is a new accounting measure that calculates the degree of product equity value contained in a product or service.

In a nutshell what we know now is that when 46% to 69% of the equity of new public corporations are given free to a precise number of customers simultaneous to the product purchases then the price of the free stock is ALWAYS greater by 3, 5, 11, 20, and over 40 times the price of the product or services by the formula x=(a*b)/c where:

x) is stock price,
a) is revenue,
b) is earnings as a percentage of revenue, and
c) is an acceptable rate of return

What this formula demonstrates is a ‘new consuming function’ where now ‘consumption is a function of Product Equity Value©’ solving the universal demand problem without credit, debt, interest, inflation, and unemployment.
www.productequityvalue...

Taking an average example of the Product Equity Value© of future products and services a 11.5 to 1 ratio simply means that a US consumers spending one-third or $12,000 of their annually income with new customers centered corporations places $138,000 into their savings accounts effectively modifying consumers buying and employment behaviors.

The operative words here are ‘precise number of customers’. In this new corporate model's case 14 million consumers. Plug the numbers $1 product price with 63% earnings and a 3% rate of return from a new corporation with 61 million shares into the formula and then multiple the stock price by 3 shares given to each customer after the $1 purchase to see the effect of Product Equity Value©.

You should get a Product Equity Value® of 14.46 to 1…

We are paused for a paradigm shift in economics… www.productequityvalue...

Jun 28 05:01 PM

[buoy:]

Just because people are saving now doesn't mean they will be spending anytime soon.

Jun 28 05:29 PM

[H. T. Love:]

If I read your charts right, the maximum increase we saw in disposable income was $180 per month. This approximates to $41,54 per week.

I arrived at this by multiplying the monthly increase by 3 and divided by 13, the number of weeks in a quarter.

I don't know what is included in disposable income in your charts, but I'm goind to presume that it is only after basics like rent, food, home utilities, etc. are covered.

With fuel costs back up, a large chunk of that new income ($10, $20 per week?) goes right to commuting costs to get to/from work, etc. Increasing state and local taxes eat some more. Based on my state's recent property re-evaluations (you'd be amazed how much *appreciation* my property experienced in the collapse of property values) to increase state income, let's say another at least $20-$30 a month there. So $70 - $110 per month already gone.

Savings @ 6.9% is about $2.85/week, so another $12.85/month gone from disposable income.

I guess that leaves somewhere around $97-$57 per month. That's $22.38 - $13.15 per week in the consumer's pocket.

Not a lot of additional spending power if we have any other inflation at all.

If they smoke, buy soda pop or any other thing that BOH/Pelosi decided they can tax the crap out of, the numbers are reduced further (more precisely, actual purchasing power is reduced by the amount of the increased taxes).

Yep, I'm all a-twitter with this big gain.

HardToLove

Jun 29 06:17 PM

[Dr. Bill Co...:]

HardToLove,
My apologies; the chart's vertical axis should have been labeled "$ billion change, month to month." The definition of disposable income used is straight from BEA; subtracts from income taxes but not any spending at all; plenty of explanation at bea.gov. Also note that the data are at an annual rate. Quick calculation is that it comes out to an extra $128 per household per month.

You are right that this is not much, but the decline in consumer spending last fall was much smaller per household--but it had massive effects on the economy.

Jul 09 01:32 PM